What is your investment philosophy?

Brandes Investment Partners, L.P. (“Brandes”) is a bottom-up, Graham and Dodd, value-oriented, investment manager. In short, the firm believes that a strategy of buying businesses at a discount to the firm’s estimate of their true value is designed to produce competitive long-term results.

How does Brandes differ from other value managers?

Below are four key traits that the firm believes differentiate Brandes from other Value managers:

1. Belief
The firm does not change its investment process due to short-term movements in the market. The firm believes the consistent application of its philosophy has rewarded patient, long-term investors with favorable performance results and limited risk. The firm applies its investment philosophy consistently in all market conditions and in security markets around the globe.

2. Independence
The firm has a 100 year vision that remains consistent with a commitment to independent ownership and value investing principles.

3. Research
Brandes Investment Partners considers itself a research-driven firm. The firm believes its abilities in this area have made a substantial contribution to the competitive returns it has achieved for clients. The firm’s primary research focus is on the financial fundamentals of a company, with an emphasis on analysis of the income statement and the balance sheet. The primary responsibilities of the research teams are to conduct general research and make recommendations regarding potential securities valuations to the firm’s investment committees.

4. Teamwork
The investment committees, which include senior investment professionals, are an example of the firm’s team-oriented investment process. After analysts present their valuation reports and answer any questions posed by committee members, the investment committee as a team assigns intrinsic value estimates to companies and decides which companies will be held in strategies. As a result, no single individual is in charge of purchase and sale decisions – instead, the entire team participates in the decision-making process. Therefore, the departure of one individual should not materially impact the firm, its investment process, or the performance of its products.

What is Brandes' investment process?

As global investors, the firm literally has a world of investment possibilities on its plate. The firm’s first goal is to narrow this field to a manageable number of prospective candidates that deserve thorough, in-depth analysis. Analysts start by using computer databases to screen more than 5,000 companies across the globe. Characteristics focused on at this stage include price-to-earnings and price-to-book ratios, liquidity, and market capitalization.

This persistent screening yields potentially undervalued companies that deserve a thorough examination. As a result of the firm’s screening process, these companies tend to have similar traits, such as low valuation ratios. Often, these companies are also out of favor and have stock prices that may have been depressed by recent developments. In other cases, a company might simply belong to an unexciting industry that the investment community has largely ignored.

To gain a fuller understanding of each of these candidates, analysts thoroughly review them, one by one. Analysts first apply the principles of the firm’s investment philosophy to determine an estimate of each company’s value. Then, analysts formally present the most compelling opportunities to the firm’s investment committees, where the product-level purchase and sale decisions are made.

The investment committees, which include senior investment professionals, are an example of the firm’s team-oriented investment process. After analysts present their valuation reports and answer any questions posed by committee members, the investment committee as a team assigns intrinsic value estimates to companies and decides which companies will be held in strategies. As a result, no single individual is in charge of purchase and sale decisions – instead, the entire team participates in the decision-making process.

The committees also set buy and sell price targets, security-by-security target weightings, and diversification constraints. Decisions are implemented firmwide, in accordance with each client’s account restrictions and guidelines.

When will you sell a security? Why did you sell XYZ company?

The core goal of the investment process is to build strategies with high overall average margin of safety (“MOS”) which the firm believes offer attractive long-term appreciation potential.

Within this process, an equity security is typically sold when another security with a meaningfully higher MOS is identified and available. This generally occurs in two ways:

A full sale of a position often occurs when a security’s price is close to its intrinsic value estimate.

A partial sale, typically after price appreciation, may occur in order to buy other securities that the firm believes have a higher MOS.

Over extended periods, equity strategy turnover generally averages between 20% and 40% per year, reflecting the firm’s long-term investment focus. Turnover in any specific year depends on available opportunities and may be meaningfully above or below that long-term average range.

Where are your offices located?

The firm and its equity investment personnel are primarily headquartered in San Diego. Locating the majority of the firm’s equity investment personnel in one office facilitates the firm’s team-oriented investment process. Our fixed-income professionals are primarily based in our branch office in Milwaukee. The firm has three affiliate offices:

What are the characteristics of your equity strategies?

The firm focuses on the fundamental characteristics of a company in order to develop an estimate of its intrinsic value. The firm usually looks for low price-to-cash flow, low price-to-book, and low price-to-earnings ratios. In addition, strategies usually have medium to large average capitalizations. The firm’s value style generally precludes purchases of stocks with high price-to-book and high price-to-earnings ratios as well as new issues, with the exception of privatizations of established businesses. There are generally no restrictions on which securities to buy, unless a client's investment restrictions and guidelines prohibit certain types of securities.

How do you manage risk?

Risk is managed not only through diversification, but also by emphasizing companies trading below what the firm believes to be their intrinsic values. The firm measures risk by comparing the price of the stock to its estimate of the value of the business, believing that the best way to help reduce risk is to buy companies with low price to value ratios. The effect has been to produce strategies with standard deviations typically below their respective performance benchmarks. Also, because the securities in the firm’s products tend to be high quality and potentially undervalued, the firm’s products often perform better in defensive market environments.

Diversification does not assure a profit or protect against a loss in a declining market.

What are your sources of research?

The firm’s San Diego-based staff conducts the majority of investment analysis, approximately 75%, internally. While analysts do travel to visit companies worldwide, the firm does not feel that company visits are the primary source of the value it adds.

External sources of information comprise approximately 25% of the firm’s research effort and include many of the major international and domestic research houses. However, in looking for new ideas, the firm tends to avoid popular stocks and widely followed sources, preferring instead out-of-favor or overlooked stocks. A breakdown of research sources is as follows:

Do you use a committee approach? How do these committees function?

Investment decisions that impact all portfolios in a strategy are the responsibility of the appropriate investment committee. This includes decisions on which securities will be utilized in client portfolios for that strategy. The investment committees establish target commitments to individual securities of up to 5% of a portfolio at the time of purchase, subject to diversification constraints. The committees also set buy and sell price targets.

The six equity investment committees are comprised of a limited number of research analysts and portfolio managers. Individuals with analyst responsibilities perform general research and make valuation recommendations regarding potential stock candidates. Each equity committee has a specific focus. The committees are: GLIC-global/U.S. strategies, INLC-international/non-U.S. strategies, MCIC- mid cap strategies globally, SCIC- small cap strategies globally, and EMIC-emerging markets strategies, and our newest committee, ACIC-focused on global opportunities strategies. Each equity committee has four or more senior investment professionals.

In addition to the six equity investment committees, the firm maintains an Investment Oversight Committee (“IOC”). Its function is to help ensure the continuity of the firm’s Graham and Dodd value philosophy and investment process. The IOC’s members include Executive Committee members and senior investment professionals. The IOC includes individuals with a range of investment and client service backgrounds. Membership of the IOC is reviewed annually by the firm’s Executive Committee. The IOC establishes broad standards and practices to be followed by the investment committees.